issuance of stock

Question 1

when does it occur

Answer 1

when corp. sell its own stock (only OWN, not another corps.)

• one way a corp can raise capital (investors buy stock and thereby become holders of an “equity security”. they are owners of corp
• distinguish from issuance of bonds: witha bond, investor makes a loan to corp, to be repaid (with interest) as agreed in K. Holder of bond is a creditor (not owner) of corp and holds a “debt security”

Question 2

debenture

Answer 2

a loan, the repayment of which is not secured by corporate assets

Question 3

subscription

Answer 3

written, signed offer to buy stock from corp.

revocation of pre-incorp. subscription:
-irrevocable for 3 months UNLESS the subscription provides otherwise or all subscribers agree to let you revoke (so those forming corp. can rely on monies being there)

revocation of post-incorp. subscriptions:

• yes, until accepted by the corp. (so when board accepts offer)
• sale to subscribers must be uniform within each class or series of stock

subscriber default after corp. accepts:

• if subscriber has paid less than half of purchase price, and fails to pay rest within 30 days of written demand, corp. can keep money paid and cancel shares. shares then become authorized and unissued, so corp. can sell them
• if subscriber has paid half or more, and fails to pay rest within 30 days of written demand, corp. must try to sell stock to someone else for cash (or binding obligation to pay cash). if no one will pay remaining balance, same situation as above. if someone will pay more than remaining balance due, defaulting subscriber recovers any excess over what was agreed to be paid/what was due to corp (minus corp’s expenses in selling to new guy)

Question 4

forms of consideration

Answer 4

five permitted forms:
money (cash or check); tangible or intangible property; services already performed for corp. (including services performed in forming corp); binding obligation to pay money or property in future; binding obligation to perform future services having an agreed value

prohibited forms:
anything other than five permitted forms and when stock is issued for no consideration. if issued for no consideration, it is called unpaid stock and is treated as water

Question 5

amount of consideration

Answer 5

par= minimum issuance price –must receive at least that

no par=no minimum issuance price so can be sold for any price; if no par, board sets price at which to sell stock unless certificate lets SH do it

treasury stock= stock that was previously issued and has been reacquired by corp. corp. may then sell treasury stock. no minimum for T stock–treat as no par.

acquiring property with par value stock:
allowable form of consideration as long as property meets par minimum. board’s determination of value of consideration is conclusive if made without fraud.

consequences of issuing par stock for less than par value (ie watered stock):
corp can sue for the amount under value (the water) (creditors can sue if corp is insolvent). directors liable if they knowingly authorized the issuance. X who bought watered stock is liable because charged with notice of par. if X transfers stock to 3P, 3P not liable if she acts in good faith (ie doesn’t know about water). 3P’s status has no effect on liability of X and directors.

Question 6

pre-emptive rights

Answer 6

right of an existing SH to maintain her % of ownership by buying stock whenever there is a new issuance of common stock for money (which includes cash or checks)

• treasury stock not included in common stock unless certificate says so.
• pre-emptive rights don’t attach to issuance within 2 years of formation.

pre-emptive rights exist only if certificate says so

Note: preemptive rights cannot be exercised in several situations: they don’t attach to shares authorized in original certificate and sold within two years of filing of certificate; they don’t attach to shares offered for consideration other than cash